Court Case Poses Challenge to Scientology Tax Break

San Francisco Chronicle/March 24, 2004
By David Cay Johnston

Los Angeles -- A trial is to begin here on Wednesday morning to determine whether a Jewish couple can deduct the cost of religious education for their five children, a tax benefit they say the federal government has granted to members of just one religion, the Church of Scientology.

The potential ramifications are huge, for a ruling in favor of the couple could affect the millions of Americans who send their children to religious schools of all types. At stake is whether people of all religions can deduct the cost of religious education as a charitable gift, as Scientologists are allowed to do under an officially secret 1993 agreement with the Internal Revenue Service.

That agreement came despite a 1989 Supreme Court ruling denying tax deductions for money paid in fees set by the Church of Scientology for its "auditing" and "training" services. The Supreme Court decision said the money did not qualify for the charitable gift deduction because it involved a fixed price and was akin to a fee for a service.

The couple, Michael and Marla Sklar of Los Angeles, originally took the I.R.S. to court after being denied $2,080 in 1993 deductions for religious education for their children. They lost that case, in which Mr. Sklar, a tax accountant, represented himself at trial. The couple appealed, and three judges on the Court of Appeals for the Ninth Circuit ruled against them two years ago. But one judge also took the unusual step of suggesting further litigation that would better define the issues.

The judges in the original Sklar case said "it appears to be true" that Scientology - founded by L. Ron Hubbard, the science fiction writer, in the 1950's - received preferential tax treatment in violation of the First Amendment.

"Why is Scientology training different from all other religious training?" Judge Barry D. Silverman wrote in his opinion, adding that the question would not be answered just then because the court was not faced with the question of whether "members of the Church of Scientology have become the I.R.S.'s chosen people." Judge Silverman then recommended litigation to address whether the government is improperly favoring one religion.

"If the I.R.S. does in fact give preferential treatment to members of the Church of Scientology - allowing them a special right to claim deductions that are contrary to law and disallowed to everybody else - then the proper course of action is a lawsuit to put a stop to that policy," Judge Silverman wrote.

In this second trial, also against the I.R.S. and involving $3,209 of taxes for 1995, the Sklars are represented by Jeffrey I. Zuckerman of Curtis, Mallet-Prevost, Colt & Mosle in Washington, who is serving pro bono.

The chief tax lawyer for the Church of Scientology, Monique E. Yingling, said the Sklar lawsuit was baseless. She said that until the 1993 agreement, Scientologists were discriminated against by not being allowed to take charitable deductions.

"Scientologists now are being treated the same as everyone else, Catholics, Mormons, Hindus," she said, her list of religions continuing.

"Auditing and training are both Scientology religious services," Ms. Yingling said, that members "participate in to advance in Scientology."

Mr. Sklar, though, said he saw no difference between the services that Scientologists cite for their deductions and the religious training his children receive at two Hebrew schools in Los Angeles.

On their tax returns, the Sklars claimed charitable deductions equal to the portion of the Hebrew school tuition that covers the cost of religious education. He said that were he a Scientologist, it was clear he could deduct these sums.

When the Sklars tried to take the deduction, the I.R.S. sent them letters laying out the terms for Scientologists to take such deductions. The I.R.S. then denied the deductions because the Sklars did not provide receipts from the Church of Scientology.

Other than the Sklars, the only known legal challenge to the I.R.S. agreement with the Scientologists was made by the nonprofit publisher of Tax Notes magazine. It tried unsuccessfully to get a judge to make the agreement public. (Copies of what seem to be the agreement were leaked several years ago.)

"The reason I got started on this course of action was I felt that there was a precedent being set that is extremely dangerous," Mr. Sklar said. "If the government is allowed to do this unchallenged, it means you have a state-favored religion, and that has never fared well for the Jews."

Mr. Sklar said that after he pressed his claim for a charitable deduction, the I.R.S. audited him and eight clients. "I think the I.R.S. was harassing me because before I had maybe one audit in two years," he said.

A subpoena for the secret agreement with the Scientologists has been quashed at the request of the Church of Scientology and the I.R.S. A fight over access to that agreement is likely to be a crucial issue on appeal, which seems certain regardless of how the trial judge rules.

Mr. Sklar said that after more than a decade of tax breaks for Scientologists, he believed that the only proper course for the courts was to allow people of all faiths to take charitable deductions for the costs of religious education and training.

But Judge Silverman, who had urged litigation to settle the issue, took a different approach in his opinion two years ago.

"The remedy," he wrote, "is not to require the I.R.S. to let others claim the improper deduction."

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